EU lobby steps up as funds fear capital carnage

MONEY market funds (MMFs) fear planned EU rules to treat them like banks could hit returns, push some funds under and dent investment in companies and government debt.

Banks and industry groups have told City A.M. they are stepping up their lobbying efforts to explain to legislators funds are not like banks and should not have to build similar capital buffers.

MMFs are designed to invest in high quality, liquid assets so that investors can leave money with them overnight in a system which should give as much, or even more, easy access and security as a deposit with a bank.

The European Commission argues this means MMFs are like banks, and should be regulated by them, which the industry fears could make many large funds unviable.

“These funds are an extremely important source of funding for financial markets and governments – this is a huge risk to take with an industry with up to €1.5 trillion (£1.3 trillion) invested,” said Marc Saluzzi, chairman of the Association of the Luxembourg Fund Industry. “You are not going to be able to build a fund if you have to look every day at this capital requirement.”

He said he and the rest of the industry has had to step up its lobbying campaigns on a permanent basis, as regulation “is now driven by politicians” instead of regulatory authorities.

And a senior investment banker who works in the sector said the capital buffer will harm Europe’s other policy aims, which include plans to reduce companies’ reliance wholly on banks when looking after cash.

“It will reduce options for investors who are looking for daily funds, making it harder to diversify their investments away from banks, at a time when regulators want them to diversify,” he said, acknowledging the extra lobbying work is now underway. “It is early days in negotiations, and we have a long way to go in educating regulators on the ramifications.”